Nautilus 2007 Annual Report Download - page 62

Table of Contents
In October 2006, the Company filed a complaint in the Superior Court for Clark County, Washington against Gately’s LLC seeking damages in
the amount of $5.1 million plus interest, attorney’s fees and costs, for collection of outstanding accounts receivable for product purchased by
Gately’s. This case has been dismissed and refiled by the Company in state court in Boulder County, Colorado. In its answer to the complaint,
Gately’s has asserted defenses to payment and counterclaims against the Company in an unspecified amount. In September 2007, Gately’s filed
a petition for bankruptcy which has stayed the litigation in Colorado. In September 2007, as a result of the bankruptcy filing, the Company
reserved the remaining $4.8 million of this receivable.
On October 17, 2007 the Company entered into a series of agreements (the “Land America Agreements”) under which the Company or its
wholly-owned subsidiaries were to acquire or lease substantially all of the assets of Land America Health & Fitness Co. Ltd. (“Land America”)
and Treuriver Investments, Ltd. (“Treuriver”). Land America is primarily engaged in the manufacture of products for the Company in a
manufacturing facility located in Xiamen, People’s Republic of China, and Treuriver is Land America’s related trading company. The Land
America Agreements were entered into following the exercise, on June 29, 2007, of purchase options set forth in Purchase Option Agreements
which the Company entered into on February 1, 2007. The Company had previously paid Land America and Treuriver non-refundable deposits
of $18.5 million in connection with the purchase agreements.
On January 19, 2008, the Company gave written notice to Land America and Treuriver exercising its rights to terminate the Land America
Agreements on the basis that (i) all of the conditions to closing set forth in the Land America Agreements had not been satisfied or waived,
and/or (ii) the Closing (as defined in the Land America Agreements) had not occurred prior to the Termination Date (as defined in the Land
America Agreements).
By letter dated January 21, 2008, legal counsel to Land America and Treuriver notified the Company that Land America and Treuriver consider
the Company to be in breach of certain duties set forth in the Asset Purchase Agreements and that Land America and Treuriver have incurred
unspecified economic damages as a result of such alleged breach.
The Company recorded a $19.4 million charge in general and administrative expenses for the year ended December 31, 2007 for the suspended
acquisition of Land America and Treuriver, which includes the non-refundable deposits and costs incurred during due diligence efforts. The
Company has $5.0 million remaining in an escrow account at December 31, 2007 related to the acquisition which is included in prepaid
expenses. The deposit was returned to the Company in the first quarter of 2008.
On October 29, 2007, Sue Repenning, individually and on behalf of a group of allegedly similarly situated individuals, filed a suit against the
Company for violation of the federal Fair Credit and Accurate Transaction Act (“FACTA”). The case, filed in federal court in Cleveland, Ohio,
alleges that the Company was not compliant with certain aspects of FACTA as regards the proper display of credit card information for
customers who place an order for products on the Company’
s website. Plaintiff seeks the statutory penalty set forth in FACTA for each violation
which ranges from $100 to $1000 per violation, as well as punitive damages, and attorneys fees and costs.
The case is in the early stages of discovery and has not yet been certified as a class action. The Company denies any liability under FACTA and
believes that its procedures and protocols comply with applicable law, including FACTA and further denies that the case is certifiable as a class
action. The Company is vigorously defending the matter.
In addition to the matters described above, from time to time the Company is subject to litigation, claims and assessments that arise in the
ordinary course of business, including disputes that may arise from intellectual property related matters. Many of our legal matters are covered in
whole or in part by insurance. Management believes that any liability resulting from such matters will not have a material adverse effect on the
Company’s financial position, results of operations, or cash flows.
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